Tuesday, January 29, 2013

Dismay is growing over the government's Funding for Lending Scheme (FLS) which is driving down already-depressed savings rates down to record lows just to prop up an inflated property market.

The FLS was announced by George Osborne in 2011 and sold as a practical way of freeing up credit and boosting the economy.

The real effects are now becoming clear to anyone looking for a savings account. Only a few months ago 3% + was possible particularly for 1 or 2 year fixes. But now savers are being "slaughtered" in the words of one expert and you have to shop around to get 2% - see this Telegraph article if you haven't read about (or experienced) this.

One of the worst aspects of FLS is the impact on passive savers, that is the people who just leave their cash on deposit without checking the rate and moving money when necessary. Their rates are often slashed to almost nothing as the banks and building societies will only pay out even the miserly 2% to savers who constantly hawk their money around looking for bonuses and new deals.

And what's it all for? How much of this promised "growth in the economy" can we expect?

A bit in the short term maybe. Some lenders are offering better fixed rate mortgage deals so the housing market will stay inflated for longer, thus putting off the day when the banks have to write down their home loan portfolios properly and recapitalise.

Not much sign of the banks lowering variable mortgage rates though and these are what most people pay after 2 year deals run out.

Also little sign of the promised cheaper business loans. Most reports I have seen have suggest there has no real change in business lending levels or the terms available.

The chart I have posted with this article is the HM Treasury's way of describing the scheme. As government always do with their funny money policies the government portrayed it as a painless "win-win" with no victims. When he announced this supposed "good news" Osborne never mentioned anything about the disastrous effects on savers.

But savers spend money too. Many pensioners for example pay their basic bills with the pension and use the interest on their savings for discretionary spending. That income has just been slashed by 30-40%. How does that help demand?

Thursday, January 17, 2013

I don't want to bang on about it too much but a couple of things have come to my attention which reinforce the sentiment of the original post: the policy is unfair to the vast majority of people who are not "problem drinkers" and the government is trying to push it through with some dodgy stats (see Cameron's dodgy dossier).

Firstly I read David Cameron's defence of the policy he is championing so strongly, contained in the forward to the Government Alcohol Strategy. He claims that half of all alcohol consumed in the UK is "binge drinking" (apparently 2 glasses of wine qualifies as a binge).

He writes that something must be done and the "root cause" is cheap alcohol which we must "come down hard on". Well thanks to massive pub-closing, job destroying alcohol duty rises we have seen drinks prices soar in recent years. And perhaps this is why alcohol consumption has fallen.

Although this was mentioned nowhere in Cameron's statement or the entire government strategy document, which gave the impression of a sozzled Britain out of control on binges of epic proportions, there has been a big shift towards lower consumption even by the government's own figures (produced by HM Customs and Excise) which show a 13% fall in alcohol consumed between 2005 and 2010. Sales have declined further since. Alleged binge-drinking among men under 24 is down by 10%.

Presumably the PM leaves out this inconvenient information to leave us all under the impression that an extra £96 in the average couple's drinks bills is a price we all have to pay to crack down on the hardcore drunks who are causing so much concern.

And there is a problem. Alcohol-related hospital admissions have climbed steadily from 500,000 in 2002 to over a million in 2009. Grim stats but not ones that were improved by the fall in average consumption. In fact the evidence suggests that whacking up prices for normal people merely reduces their enjoyment and disposable incomes while doing nothing to deal with the complex social problem of alcohol abuse.

The other stat I saw was reported in the Telegraph - the Treasury have forecast that alcohol consumption will continue to fall (by 2.4 billion units!) over the next 6 years. And these forecasts explicitly do not take account of Minimum Alcohol Pricing.

In summary the government wants to bring in higher drinks prices by law on top of big tax rises to achieve something which its own figures say is going to happen any way. The stats on hospital admissions also seem to show that punishing moderate consumers does nothing to stop alcohol abusers harming themselves and society.

The government should look at its own statistics and withdraw the Minimum Alcohol Pricing proposal.

Thursday, January 10, 2013

The Eurozone crisis may have stabilised, but it's still all doom and gloom for the Spanish property market if the latest reports are to be believed.

Last year's average price fall of around 10% will be followed by five more years of declines and further falls of 30% according to the reports.

The course of the Eurozone crisis took in 2012, with Spain firmly in the spotlight for much of the year, is behind the latest volley of depressing statistics for Spanish homeowners. It is not just that austerity measures were ramped up, joblessness jumped and capital flight accelerated during the year.

Specific developments in the Spanish banking sector have driven the property market at least as much as these general negative factors. Although Spain's outrageously oversized property bubble burst in 2008 the banks had not been forced to take the full hit until last year.

For several years the banks were allowed to either forebear from repossessing properties or, when they did take possession, were able to hold the foreclosed assets on their balance sheets at inflated values (e.g. cost or amount of mortgage). This way they didn't crystalise their losses and have to raise more capital or, in the worst cases, go out of business.

From the point of view of the property market this meant that headline prices only declined gently for the first few years of the market. Things became frozen - no one moved, no one slashed their prices and the market was not allowed to find its bottom. Similarly the government did everything it could to sustain the unsustainable in the wider economy though it shouldn't have (Stimulus doesn't work - just look at Spain).

The bank stress tests and subsequent recapitalisation changed all that forcing the major lenders to recognise their potential losses and sell off assets.

So at least now the grand clear out can begin. Bargain hunters and overseas investment funds will appear and some activity will return albeit at much lower price levels. After a couple of years of pain we may at least be able to say we are nearer the end than the beginning.

Tuesday, January 1, 2013

There have been plenty of contenders for the year’s worst (UK) government policy. The coalition seems to have inherited Labour’s desire to meddle, fiddle and tweak and the uneasy marriage of Lib Dem lefties and nominally right wing Tories has been a recipe for fudge and confusion.

This has led to a bumper crop of terrible policies including:

-George Osborne’s “tax cuts for employment rights” policy was designed to please right wingers but was just another politician’s wheeze which backfired at the taxpayer’s expense (and confirmed that George’s scary similarity with Gordon – see “Oh No it’s Geor-don!”);

-Ed Davey’s horrible energy bill which slaps an extra £100 onto fuel bills for a hotchpotch of measures which will damage the UK economy but do nothing to “combat climate change”. In a world where India and China are building new coal-fired stations every week, the UK messing around with wind farms and subsidising loft insulation is an expensive irrelevance. Davey’s bald-faced assertion that his measures will eventually reduce bills by £94 (compared to what they would have been without the bill) was political lie of the year ;

-Separately the £2bn “climate aid” pledge to assist with climate change projects in the developing world had massive-waste-of-money written all over it;

-The way the Treasury rowed back on the child benefit cuts for rich people was also depressing. The original cut, announced last year, was the right thing to do but was badly botched from the start, penalising single-wage households. The efforts to undo the damage have watered down the savings and added another huge layer of complexity to the tax system (see this if you don’t believe me see Couples face “who buys toys” quiz by taxman to get a flavour of the madness);

-Kicking Heathrow airport expansion into the long grass (yet again) while simultaneously making UK air passenger tax the highest in the world, was a great example of political expediency trumping the long term economic interest of the country; and

-Getting control over Labour’s crazy “open door / open wallets” immigration policy is important but the coalition have set an arbitrary target of limiting non-EU immigration and Theresa May is trying to reach it by clamping down on students from abroad and skilled workers business needs. Leaving the EU and restricting welfare payments to citizens who have earned it would be a better bet (see EU’s migrant rules prove the referendum case).

So what could be worse than this lot? Well my nomination as worst government policy of the year is Minimum Alcohol Pricing. It’s at the White Paper stage now so not law but it will be soon, particularly given that the PM has thrown his weight behind it (so we can’t blame the Lib Dems for this one). It may not be the policy with the most serious bad consequences but it is truly awful for lots of reasons which I describe here: Minimum alcohol price: Cameron’s dodgy dossier